Are you Cutting A Check to the IRS this Year?

As the tax season draws to a close, you may be reviewing your tax return with some displeasure. Did you cut too large of a check to the Department of Treasury for your 2014 tax bill? If so, there are several options for you to consider to lessen the tax burden for 2015.

Due to the contingent nature of compensation as a plaintiff lawyer, unique pre-tax and tax deferred retirement planning options are available. Herein we will compare and contrast traditional small business retirement plans with some of the unique tax deferred options available when you earn a contingent fee.

The following are common advantages to deferral in general:

Creating an automatic investment program to help augment your retirement

The possibility of paying less tax on the withdrawal than the current tax rate

Potentially manipulating tax brackets during the deferral years and the withdrawals years

Earning interest on money that would have gone directly to your immediate tax burden

Being able to invest 100% of the money pre-tax instead of after tax

Given these obvious advantages, which of the following is the best fit for your practice? The information below may be helpful in determining which plan or combination of plans makes the most fiscal sense.

Traditional Small Business Retirement Plans

A few examples of those that would fall under the traditional options include 401(k)s, Defined Benefit Plans, Profit Sharing, SEP IRAs and Simple IRAs are a few that would fall under the traditional options. These plans allow employees/owners to contribute funds on a pre-tax basis into the plan. The plan typically has a myriad of investment options to consider. All taxes are deferred until the funds are withdrawn.

Most small business plans require the employer match employee contributions

These plans are typically subject to withdrawal penalties before age 59.5 and RMD withdrawals beginning at age 70.5

Attorney Fee Structured Settlement Plans

Attorneys are allowed to defer their fees by utilizing structured settlement annuities similar to those that are used for planning purposes with personal injury clients. The fee structure is not tax free, but is instead tax deferred. One hundred percent of the fee can be put into the fee structure or just a portion of the fees. It is done on a pre-tax basis so that taxes are not recognized until the year in which future periodic payments from the fee structure are received. For example, an attorney can earn a $250,000 fee in 2014 but set up a payment plan that pays him from 2020 to 2030. There would be no taxable income in 2014, the entire $250,000 fee would go into the fee structure annuity and the tax burden would be spread out from 2020 to 2030.

Pros:

Easy to use

No investment risk

Unlimited deferral amount

No early withdrawal tax penalties

Ability to create a lifetime income

Cons:

Plan cannot be modified after the release is signed (No acceleration or deceleration of payments)

Fixed investment option only

Coordination with Client and Defendant required

Alternative Fee Deferral Programs

Several new alternatives have popped up in the marketplace over the last few years that rely on the same premise and case law as the Attorney Fee Structured Settlements. The two that are most commonplace are the use of offshore assignment companies and deferred compensation programs.

Offshore Assignment Companies (non-insurance partners) allow the attorney to defer the fee into the Assignment Company that then invests the proceeds through a variety of investment options.

Pros

Variety of investment options

Unlimited deferral amounts

No early withdrawal tax penalties

Cons

Plan cannot be changed after the release is signed (No acceleration or deceleration of payments)

Complex investment program involving offshore assignments

Coordination with Client and Defendant required

The Deferred Compensation program is done through the use of a Rabbi Trust. This option does not involve an offshore assignment and has flexible withdrawal options.

Pros

Variety of investment options

Unlimited deferral amounts

No early withdrawal tax penalties

Withdrawal rights can continue to be deferred

Simple language Incorporated in Client Agreement (not release)

Cons

Complex investment program for highly qualified investors

Ongoing investment management and withdrawal decisions

As this article points out, there are pros and cons to each alternative. Each attorney should seek out a qualified planner and tax professional to help them navigate the options. In all probability, the best option is a combination of the programs. A fixed income component, such as a fee structure annuity, is a wise piece of any diverse investment portfolio. Plaintiff attorneys should carefully consider whether adding fixed income pre-tax makes the most sense for their financial goals. In addition, other alternative deferred compensation programs should be explored as well.

Please contact Synergy today at 877-242-0022 or info@synergysettlements.com for more information on utilizing these unique planning opportunities exclusively available for contingent legal fees.

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TESTIMONIALS

“Synergy is our guiding light for deferring our contingent legal fees and planning for retirement. The lawyers at Panter Panter & Sampedro, myself included, have been working with them for over ten years using different methods to defer comp and plan for retirement.”

Brett Panter Panter, Panter & Sampedro

"I don't think I've directly said "thank you" for helping us with Bridgett’s case. We sent the reduced payment to Medicaid and called Bridgett's mom to tell her approximately how much money was going to be left for Bridgett and she broke down over the telephone. Given only $25k of insurance and a $850k medical bill from the hospital she didn't think Bridgett would ever see a penny."